In order to move forward on the way to economic progress, Pakistan needs to maintain political stability, structural reforms, and sound macroeconomic management, says Asian Development Bank's resident mission policy note on Pakistan's public debt, which saw remarkable turnaround.
The RM starts a new series of policy notes and the first one issued in April gives a brief review of Pakistan's public debt. According to the RM's note Pakistan was facing a serious financial crisis in 1999 but economic turn around during the present regime put Pakistan on a growth path ie in macro-economy including improvement in public debt indicators.
It says public debt is an important means of bridging government financing gaps. When Pakistan entered 21st century, its public debt had exceeded 90percent of its GDP, over 600percent of its annual revenues, and debt servicing accounted for over half of current revenues.
Moreover, in 2001, Pakistan was the only country in South Asia to be classified as a severely indebted country by the World Bank because it had to seek exceptional financing arrangements from the International Monetary Fund in January 1999, after facing a severe balance of payments crisis. The economy of the country has experienced a turnaround since 2000. Growth has accelerated and most macroeconomic indicators have improved.
Similarly, public debt indicators have also shown significant improvement. Modest growth in public debt coupled with the strong growth in nominal GDP, led to a significant fall in public debt to GDP ratio, from 81.4percent in 2001-02 to 56.1percent in FY 2006. Over the same period, domestic public debt to GDP ratio fell from 40.4percent to 29.9percent, while the external public debt to GDP fell from 41percent to 26.2percent.
The improvement in the public debt to GDP ratio in FY 2006 was due to the fact that both domestic and external debts grew slower than GDP. The growth in domestic debt has been slightly faster than that of external debt. It rose by about 5.9percent while external public debt grew by about 5.0percent relative to the previous year.
As a result of a stronger rise in domestic debt, the share of external public debt in total public debt decreased from 50.4percent in FY 2002-03 to 46.7percent in 2005-06.
As growth in foreign exchange earnings in Pakistan outpaced the growth in debt servicing payments, external public debt servicing as a share of exports of goods and non-factor services declined from 35.8percent in 2001-02 to 14.1percent in 2005-06. Moreover, the external debt service to gross reserves ratio has declined from about 70percent in 2001-02 to over 20percent in 2005-06.
The improvements in debt indicators reflect acceleration in economic growth, improvement in fiscal conditions, increase in export earnings, and higher capital inflows. In particular, external conditions have become more favourable to Pakistan since Sep. 2001. This has enabled relief of public debt amounting to about $3.7 billion between 2001and 2003. There have been increased official transfers, especially between 2001 and 2004 as total official transfers amounted to about $4.5 billion from 2001-2006.
Similarly, Foreign Direct Investment (FDI) rose from $483 million in FY 2002 to $3.5 billion in FY 2006. While Pakistan has significantly improved its economic performance and the debt situation, strong efforts must be made to guard against potential risks.
First, the improved debt indicators in Pakistan are closely linked with favourable external conditions. To sustain sound economic performance over the long term, Pakistan must maintain political and economic stability. Economic reforms must go on apace to sustain and improve domestic and foreign investors' confidence.
Second, coupled with strong capital inflow, the current account deficit has increased since 2005. To a certain degree, a current account deficit and balance of payments surplus indicate the strengths of the domestic economy and the confidence of foreign investors in the domestic economy.
Comments
Comments are closed.